Sample Multiple-Choice Questions

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1 E03 3 Microeconomics Summative Exam SAMPLE QUESTIONS Sample Multiple-Choice Questions Circle the letter of each correct answer 1 True statements about the theory of the firm in the short run and long run include which of the following? I All input costs are fixed in the short run II All input costs are variable in the long run III At least one input price is fixed in the short run (A) I only (B) II only (C) III only () I and II only (E) II and III only 3 Which of the following statements about a firm s production function are true? I When total product is at its maximum, marginal product is zero II When total product rises, marginal product is rising III When marginal product is greater than average product, average product is rising IV When marginal product is less than average product, average product is falling (A) I and II only (B) II and III only (C) II and IV only () I, III and IV only (E) I, II, III and IV TP OUTPUT COSTS LR A B C 2 On the graph above, the onset of diminishing marginal returns occurs beyond (A) Point A (B) Point B (C) Point C () Point (E) Point E INPUT MP E AP Q Q 1 Q 2 4 According to graph above, if the firm is producing any quantity greater than Q 2, the firm is experiencing (A) economies of scale (B) minimum efficient scale (C) diseconomies of scale () constant returns (E) increasing returns OUTPUT Q 3 Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY 203

2 5 For a perfectly competitive firm, if the market price is $8 then (A) marginal revenue is greater than $8 (B) marginal revenue is less than $8 (C) marginal revenue is equal to $8 () average revenue is greater than $8 (E) average revenue is less than $8 6 A firm s short-run marginal cost curve will eventually increase because of (A) more efficient production (B) economies of scale (C) diseconomies of scale () diminishing marginal returns (E) increasing marginal returns 7 Assume that in the short run at the profit-maximizing output, the price is lower than average variable cost The perfectly competitive firm should (A) increase its price (B) decrease its price (C) increase its output () decrease its output (E) shut down 8 Assume that a perfectly competitive firm is operating where marginal revenue is greater than marginal costs To increase profits, the firm should (A) increase production (B) decrease production (C) increase price () decrease price (E) do nothing 9 If the average variable cost of producing five units of a product is $100 and the average variable cost of producing six units is $125, then the marginal cost of producing the sixth unit is COST/REVENUES (A) $125 (B) $2 (C) $250 () $350 (E) $750 P 4 P 3 P 2 P 1 P A Q Use the graph above to answer questions 10, 11 and If the firm is in short-run equilibrium at a price of P 4, a perfectly competitive firm will maximize profits by producing at which of the following levels of output? (A) Q (B) Q 1 (C) Q 2 () Q 3 (E) Q 4 11 At which price will this perfectly competitive firm make an economic profit? (A) P (B) P 1 (C) P 2 () P 3 (E) P 4 12 Which price-quantity combination represents long-run equilibrium for this perfectly competitive firm? (A) Point A (B) Point B (C) Point C () Point B C (E) Point E E Q 1 Q 2 Q 3 Q 4 AVC 204 Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY

3 AVC Industry S Firm PRICE P 13 According to the graph above, if the firm is producing at Q, the firm is (A) losing money because the firm is operating at the shutdown point (B) losing money because the price does not cover average fixed cost (C) making profits because the price is above average variable cost ()making normal profits because the price just covers average total cost (E) making normal profits because the price is above average variable cost 14 Which of the following represents the correct relationship between the demand curve for a perfectly competitive industry and the demand curve for a perfectly competitive firm? PC Industry emand (A) ownward slope to the right (B) ownward slope to the right (C) Perfectly elastic ()Perfectly elastic (E) Perfectly inelastic Q PC Firm emand ownward slope to the right Perfectly elastic ownward slope to the right Perfectly elastic Perfectly elastic According to the graphs above, in which of the following ways are the industry supply curve and the equilibrium price most likely to change in the long run? Industry Supply (A) ecrease (B) ecrease (C) Increase ()Increase (E) Not change Equilibrium Price ecrease Increase ecrease Increase ecrease Use the graph above to answer questions 16 and If price is P 2, the firm will (A) produce Q units and earn a normal profit (B) produce Q units and earn an economic profit (C) produce Q 2 units and earn an economic profit ()produce Q 3 units and earn an economic profit (E) shut down Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY 205 PRICE COSTS/REVENUE P 2 P 1 P 0 Q PRICE Q 1 Q 2 Q 3 AVC

4 17 If price is P 1, the firm will (A) produce Q units and earn an economic profit (B) produce Q 1 units and earn an economic profit (C) produce Q 1 units and earn a normal profit ()produce Q 2 units and earn an economic profit (E) shut down 18 Which of the following is true of a pure monopolist s demand curve? (A) It is perfectly inelastic (B) It is perfectly elastic (C) It coincides with its marginal revenue curve ()It lies below its marginal revenue curve (E) It lies above its marginal revenue curve 19 Average fixed cost is shown as the distance between (A) marginal cost and average variable cost (B) marginal cost and average total cost (C) average variable cost and average total cost ()average total cost and the horizontal axis (E) marginal cost and the horizontal axis COSTS/REVENUE Use the graph above to answer questions 20 and Assume that the firm in the graph above is an unregulated monopolist It will produce (A) 175 units at a price of $700 (B) 100 units at a price of $600 (C) 100 units at a price of $800 ()150 units at a price of about $500 (E) about 210 units at a price of about $ Assume that the firm in the graph is an unregulated monopolist It will earn long-run profits of (A) $0 (B) $300 (C) $400 ()$500 (E) $900 MR Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY

5 COSTS/REVENUE P 5 P 4 P 3 P 2 P 1 P A Use the graph above to answer questions 22 through For the firm in the graph an unregulated monopolist the price elasticity of demand is unit elastic at a price and an output of (A) P 5 and Q (B) P 4 and Q 1 (C) P 3 and Q 2 () P 2 and Q 3 (E) P 1 and Q 4 23 Consumer surplus for this profit-maximizing monopolist will be represented by area (A) ABP 5 (B) ACP 4 (C) AP 3 () AEP 2 (E) AGP 24 The profit-maximizing price for this firm is (A) P 1 (B) P 2 (C) P 3 () P 4 (E) P 5 Q B C MR E F Q 1 Q 2 Q 3 Q 4 G emand COSTS/REVENUE P 4 P 3 P P P 2 1 Questions 26, 27 and 28 are based on the graph above of cost and revenue curves for a monopoly firm 26 To maximize profit, this monopolist should produce at which of the following levels of output? (A) Q (B) Q 1 (C) Q 2 () Q 3 (E) Q 4 27 The price the monopolist charges at the profitmaximizing level of output will be (A) P (B) P 1 (C) P 2 () P 3 (E) P 4 28 The profit per unit will be (A) PP 1 (B) PP 3 (C) P 1 P 2 () 0P (E) 0P 3 Q MR Q 1 Q 2 Q 3 Q 4 25 Total revenue will be maximized when price is equal to (A) P (B) P 1 (C) P 2 () P 3 (E) P 4 Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY 207

6 PRICE A B C E MR Use the graph above to answer questions 29 and Under the usual regulated monopoly, the socially optimal regulated price is (A) A (B) B (C) C () (E) E 30 Under the usual regulated monopoly, the price that allows fair return (where all costs are covered and includes a normal rate of return) is (A) A (B) B (C) C () (E) E 31 What happens to a monopolist s price, profits and output if its fixed costs decrease? Price Profits Output (A) ecrease Increase ecrease (B) ecrease ecrease ecrease (C) No change Increase No change ()Increase Increase Increase (E) ecrease No change Increase 32 Allocative and productive efficiency are possible in which of the following unregulated market structures? I Perfectly competitive II Pure monopoly III Oligopoly IV Monopolistically competitive (A) I only (B) II only (C) III only () I and IV only (E) II and IV only 33 Which of the following is true of monopolists who practice price discrimination? (A) They charge all customers the same price (B) They earn a smaller profit than those who do not practice price discrimination (C) They charge customers different prices according to different elasticities of demand () They produce lower quantities than pure monopolists (E) They produce the same quantity of output as pure monopolists 34 Characteristics of an oligopolistic market include which of the following? I Easy entry and exit of firms II Few firms III Interdependence among firms (A) I only (B) II only (C) III only () II and III only (E) I, II and III 208 Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY

7 35 In the long run, a monopolistically competitive firm will make (A) more economic profit than a perfectly competitive firm (B) less economic profit than a perfectly competitive firm (C) more economic profit than a monopoly () more economic profit than an oligopolist (E) zero economic profit 36 If all of the firms in an oligopoly could, without cost, form an industry-wide cartel to jointly maximize profits, the demand curve facing the cartel would be (A) less elastic than the industry demand curve (B) the same as the industry demand curve (C) more elastic than the industry demand curve () perfectly inelastic (E) horizontal at the market-clearing price 37 Characteristics of an oligopoly, which can be demonstrated by game theory, include which of the following? I Collusion can increase oligopolists profits II Oligopolistic firms are interdependent III Independent price decision making leads to lower returns (A) I only (C) III only (E) I, II and III (B) II only () I and II only 38 The shapes of the marginal product curve and the total product curve are best explained by the (A) law of demand (B) law of supply (C) principle of diminishing marginal utility () least-cost rule (E) law of diminishing returns Royal s Burgers and Fries Concentrate on Fries Concentrate on Burgers Concentrate Brewer s Fries on Fries 120, , 120 and Burgers Concentrate on Burgers 65, , 80 Use the payoff matrix above and the information below to answer questions 39 and 40 Two competing fast-food restaurants in a small town, Royal s Burgers and Fries and Brewer s Fries and Burgers, realize that each must consider the method of attracting customers that the other is using The payoff matrix above illustrates the firms possible strategies and the relative profits to each restaurant under each possible outcome (The first number in each box represents the payoff to Brewer s) 39 Based on the payoffs above, which of the following statements is true? (A) Brewer s has a dominant strategy to concentrate on fries (B) Brewer s has a dominant strategy to concentrate on burgers (C) Royal s has a dominant strategy to concentrate on fries () Royal s has a dominant strategy to concentrate on burgers (E) Neither restaurant has a dominant strategy 40 What is the Nash Equilibrium in this game? (A) Both fast-food restaurants should choose to concentrate on fries (B) Both fast-food restaurants should choose to concentrate on burgers (C) Brewer s should choose to concentrate on fries, and Royal s should choose to concentrate on burgers () Brewer s should choose to concentrate on burgers, and Royal s should choose to concentrate on fries (E) There is no Nash Equilibrium in this game Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY 209

8 41 Which of the following is true of a cartel? (A) A cartel is a coalition of firms that seek to coordinate their decisions so all firms can earn a higher economic profit (B) A cartel is a way for firms to earn more by playing their dominant strategies (C) A cartel is considered stable () A cartel seeks to maximize total revenue of its members (E) A cartel sets price and output of its members in the same way that a price discriminating monopolist would 42 Which of the following best characterizes the firms in an oligopoly industry? AAA (A) Firms can easily enter the industry when profits are high (B) There are more firms than in a monopolistically competitive industry (C) They are independent () They always collude to increase profits (E) They use strategic decision making Advertise Acme on t Advertise Acme: 150 Acme: 100 Advertise AAA: 150 AAA: 400 Acme: 400 Acme: 0 on t Advertise AAA: 100 AAA: 0 43 If AAA advertises and Acme does not, Acme s profits will change by (A) $100 (B) $0 (C) $150 () $300 (E) $ If AAA advertises, Acme will (A) decide not to advertise because this is its dominant strategy (B) advertise because this is its dominant strategy (C) not have a dominant strategy () lose money (E) increase its profit by $400 if it advertises 45 Which of the following statements is true? (A) If AAA advertises, Acme s dominant strategy is to advertise (B) If Acme advertises, AAA s dominant strategy is NOT to advertise (C) The two firms are in a prisoner s dilemma game () The two firms would be better off to agree to save their money and NOT advertise (E) A collusive agreement to advertise would benefit both firms Use the payoff matrix above and the information below to answer questions 43, 44 and 45 Acme and AAA are the two major firms in the industry Each must decide whether to conduct a television advertising campaign The returns from each firm s decision depend on the decision of the other The profits resulting from each possible combination of the firms decisions are given in the payoff matrix above 210 Advanced Placement Economics Microeconomics: Student Activities National Council on Economic Education, New York, NY

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AP Microeconomics Review Session #3 Key Terms & Concepts

AP Microeconomics Review Session #3 Key Terms & Concepts The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph